Monday, September 16, 2013

The last post in my series on DOs and DON'Ts for early-stage startups was about lead generation. The next logical step is sales, and so I want to write about what you can do to convert as many of those leads into paying customers.

7th DO for SaaS startups

Build a repeatable, profitable sales process

Sales is a very different animal depending on the stage of your company, the market segment you're going after and on whether we're talking about inbound sales or outbound sales. For all the differences, though, the goal is always to create a scalable process which allows you to acquire customers for a small fraction of their CLTV. As a rule of thumb, you should aspire a payback time of 6-9 months, meaning that you spend 6-9 months' worth of subscription revenue to acquire a customer. It really is just a rule of thumb though, since depending on the customer lifetime and various other factors, you may want to accept a significantly longer payback period.

To achieve a payback period in that neighborhood you have three options:

If your ARPA is around $20-50 per customer per month, you need to be able to generate a large amount of leads for little money and convert them with little to no human interaction (self-service with no/low touch sales)

In order to support an inside sales force you need customers who pay you around $100 per month, preferably significantly more (often called "transactional sales").

If you need a field sales force to sell your product, assume that your ARPA needs to be at least $3000 per customer per month if not higher (enterprise sales).

Most people would argue that you need much higher prices to make inside sales work (including Jason M. Lemkin, who says you need at least $300/m), but several of our portfolio companies have shown that due to a combination of high conversion rates, fast sales cycles and sales people in countries where salary levels are 50-80% lower compared to Silicon Valley, you can use inside sales people to profitably acquire customers at much lower price points.

So – take the specific numbers with a grain of salt as they are highly dependent on a variety of individual factors. The important message is that your customer lifetime value defines what you can spend on customer acquisition. If you don't keep that in mind you'll end up in what Joel York, who created a nice visualization of the different models, calls the "startup graveyard".

In line with the theme of this series I'm going to focus primarily on the self-service and transactional models and want to break down my tips & tricks into three parts based on the stage of your company. I'm going to call them "pre product/market fit", "pre scale" and "post scale" (being well aware that the transitions between these phases are gradual). I'll focus on inbound sales in this post and will follow up with one on outbound sales shortly.

Pre product/market fit

In the beginning, while you're still trying to figure out product/market fit, spend as much time with potential customers as possible. Don't consider the time spent with customers a sales expense – it's an essential investment that you need to make in order to solve a real problem of real people.

Don't worry about scalability yet. In this phase it's perfectly fine to do things that are completely unscalable. As I wrote before, a good "unscalable hack" for SaaS startups is to spend huge amounts of time with early users.

When you've found product/market fit and start to get more and more signups every month, some of the things that you did in the previous phase start to not work any more. As long as you get 50 signups a month you can still talk to every trial customer. Once that number gets into the hundreds or thousands, you need to hire people and put some processes and tools in place.

So the goal of this phase is to maximize the conversion rate of a large and ever-increasing trial volume while keeping customer acquisition at an acceptable level and starting to get a sense for the scalability of various sales and marketing channels. With that in mind, here are some tips:

Set up an automated lifecycle email program to welcome new users, reach out to inactive users and follow-up with users towards the end of their free trial. Solutions like userfox (a portfolio company of ours) or Intercom make it easy.

Send personalized messages to as many trial users as possible. Use any piece of information that you can easily get e.g. by looking at the trial customer's website or the way he uses your software to add some personal touch. This job can be done by junior customer support or sales people. The idea is to make every trial customer feel important and show him that you care, but do it in a highly scalable way.

Segment your trial users based on factors like potential account size, activity and brand and use this information to prioritize the queue for your inside sales people. A lot of this can be automated e.g. by checking a trial customer's Alexa rank or Google Page Rank to get an indication of the company's size. Also take a look at Totango, which can help you identify your most valuable prospects. You can also use this information to assign different types of potential customers to different types of sales people (e.g. small businesses are assigned to junior customer care people, bigger ones are assigned to more senior Account Executives).

Set up a lead nurturing program for trial users who are only moderately interested in your product or don't have an immediate need for your product yet. Send them a newsletter, offer webinars, organize events... The goal is to provide them with valuable content and stay top of mind, so that when they eventually need a solution they'll think of you.

Track everything and do lots and lots of tests. A/B test different messages, find out the best moments and triggers for your lifecycle emails, test in-app messaging... In short: Try lots of different things and measure what works best.

Avoid SaaS Metrics Worst Practice #3, which is to attribute all conversions to your sales team. To calculate the effectiveness and the ROI of your sales team you have to measure the conversion uplift relative to your unaided baseline conversion.

You can still do things that you know won't scale, but you should know what these things are and leave this phase with an excellent understanding of your CACs at scale.

Post scale

In this phase you're going to double down on what you've found to be working in the previous phase. Sounds easy, but it of course comes with its own challenges: Hiring, onboarding and retaining the right people; continuing to fill the funnel with enough leads to keep your sales team busy; adapting processes and tools for a much larger sales team. At this point it's primarily a management challenge, and if you've come this far without hiring a seasoned VP of Sales, now is the time to hire one. And since this series is geared towards early-stage SaaS startups I'll leave it with this. :)